Only a couple more weeks before we ring in the New Year. But there's still time to make a few decisions that will minimize your taxes for this year and help you start out on the right foot financially next year. Consider a few of the following suggestions:
Check on last year's check
The IRS is looking for taxpayers who never collected last year's tax refund check. If your tax return from last year showed that you should have received a refund and didn't, visit the "Where's My Refund" website or call the IRS. Their toll-free number for refund inquiries is 1-800-829-1954.
Donate to a good cause
Consider making a donation to your favorite nonprofit organization. You can make a financial contribution or donate items like clothing, furniture, and even cars for fair market value. Get receipts to itemize all tax-deductible donations from this year's taxes, if you itemize. If you take a standard deduction, you won't be able to take the tax benefit for donations. If you've estimated your taxes for this year and you think you'll end up owing money, you can also consider donating stock to a nonprofit if you've already held the stock for a year. That can help lower your tax bill in two ways: (1) allowing you to avoid paying a capital gains tax on the stock and (2) allowing you to deduct the donation. It's a good idea to consult a financial or tax advisor when making investment-related decisions. Click here for tips on selecting and working with a financial professional.
Fund your IRA
If you have an individual retirement account (IRA), check to see if you have maxed out your contribution for the year. If you are 50 years or older you may be able to contribute an additional $1,000 into your IRA over the annual contribution limit. As with any investment decision, it's always wise to consult a financial professional before investing. You can also refer to the IRS website for more information on how your investments may affect your tax situation.
Up your 401(k) giving
If you participate in your employer's 401(k) retirement savings plan, check to see if you've made the maximum contribution to the plan this year. If you haven't, check to see if you can make any additional contributions before the end of the year (plan rules vary so check with the human resources department or a professional financial advisor). Contributions are made pre-tax so they lower your total taxable income. Click here to learn more about 401(k)s.
Save even if you're self-employed
There is good retirement savings news if you are self-employed! You can save on taxes while saving for retirement by funding a Simplified Employee Pension (SEP) IRA, Keogh plan or Roth IRA.
Request delayed payment or defer income
If you are self-employed, ask clients if they would defer paying you until after January 1. If you are retiring and younger than 70 1/2, consider delaying taking withdrawals from your retirement plan until January. By delaying payment or deferring income until next year, you won't have to pay taxes on it until the following April, 16 months from now!
Give to your kids
You can lower your taxes by giving a little cash to your kids. Okay, not directly to your kids - rather through something called an UGMA (Uniform Gifts to Minors Act) account or Uniform Transfers to Minors Act (UTMA) account. When you deposit money in an UGMA/UTMA account the first $850 you contribute is tax-free (meaning you can write it off your taxes) and the next $850 is taxed at your child's tax rate (which is typically much lower than your own). Contact your bank or credit union to set up an UGMA/UTMA account.
Check your flexible spending accounts.
If you have a flexible spending account through your employer, that pre-tax income MUST be spent on approved expenses before the end of the year…or you lose that money. The most common flexible spending accounts are health care and dependent care accounts. Using these accounts you can have a specified amount of money deducted from your paycheck pre-tax to cover allowable expenses each year (up to $5,000 for dependent care and whatever limit for health care expenses has been set by your employer). That means that you can create savings for anticipated as well as unanticipated expenses while also lowering your taxable income. So, for example, if you have a flexible healthcare spending account, contact the Human Resources department at your workplace to see if you have any remaining funds and if so, check to make sure that you have submitted all allowed expenses for reimbursement (i.e. over-the-counter drugs, prescription drugs, doctor visit co-pays, etc.). Flexible spending dependent care costs can include nursery school, babysitting expenses and home health care for a disabled family member.
Even though you probably have a lot to do right now, carve out a little bit of time and take some steps before year-end to help make a difference in your finances. Come next December, you'll be glad you did!